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Sofie Eger v. Commissioner of Internal Revenue, 393 F.2d 243, 2d Cir. (1968)
Sofie Eger v. Commissioner of Internal Revenue, 393 F.2d 243, 2d Cir. (1968)
Sofie Eger v. Commissioner of Internal Revenue, 393 F.2d 243, 2d Cir. (1968)
2d 243
68-1 USTC P 9331
In 1958, Hewlett was organized. Petitioner was the sole stockholder and paid
$40,000 for her 40 shares pursuant to a corporate motion and resolution of
March 31, 19592 which provided that on April 6, 1959 the petitioner was to pay
$40,000 for 40 shares of Hewlett issued pursuant to section 1244 of the Code.
Early in 1961, Hewlett filed a petition in bankruptcy under Chapter XI of the
Bankruptcy Act together with a plan of reorganization which was approved by
the referee and confirmed. At that point the petitioner was owed $62,000 by
Hewlett. Petitioner waived any right to payment she might have under the plan.
In March of 1961, petitioner entered into an agreement with Pick 'N Save, Inc.,
under which the latter agreed to buy and the petitioner agreed to sell her 40
shares in Hewlett. The purchase price was $100,000 plus the value of certain
security deposits, other items, and the value of Hewlett's inventory on the date
of closing less credits for certain secured liabilities. All payments on account of
the purchase price were to be deposited in escrow for one year after the closing
for the purpose of paying any claims is Hewlett's creditors for moneys due and
owing at the day of closing. At closing, the petitioner was to deliver an
executed release of all obligations due it from Hewlett. On April 13, the plan of
arrangement was confirmed. The next day, Hewlett reaffirmed its obligations to
the petitioner on its indebtedness to her, in a resolution which stated that the
petitioner would accept as full payment of her claims any sum paid by Pick 'N
Save left with the escrowee after the other creditors had been paid. On the same
day, petitioner's sale of stock to Pick 'N Save was closed. After payment of
Hewlett's other creditors, the escrowee had $30,000 left for payment to the
petitioner.
3
Petitioner claims that the $30,000 was received as final payment on Hewlett's
indebtedness to her, that her stock in Hewlett was worthless in 1961, and that
she was therefore entitled to a regular loss under 1244 of the Code. The
government contends that the stock in question was not 1244 stock so that all
she was entitled to was a capital loss. Or, alternatively, if the stock is 1244
stock, the $30,000 received from Pick 'N Save was received for it, so that the
regular loss available is only $10,000, and that an unresolved question of fact
remains as to the year in which the $10,000 loss was incurred. The Tax Court
held for the government, relying on a finding that the stock in question was not
1244 stock.
The Tax Court's holding that the Hewlett stock was not 1244 stock was based
upon a factual finding that the stock was not issued pursuant to a written plan as
required by the Statute and Regulation 1.1244(c)-1(c). See Bruce v. United
States, 68-1 USTC par. 9112 (S.D.Tex.1967); Morgan v. Commissioner, 46
T.C. 878, 888-890 (1966); Spillers v. Commissioner, 26 T.C.M. 1069, 1073-74
(1967); Warner v. Commissioner, 48 T.C. 49 (1967). We disagree. The
corporate minutes are a sufficient writing under the circumstances here to meet
the requirements of the statute.3 The regulations were not adopted until a time
subsequent to the stock issue here, and we cannot charge the taxpayer with
knowledge of their provisions.
5
The purpose of 1244 was to encourage the formation of small business units
found to be socially and economically desirable in spite of the high risk shown
by the high percentage of failure of such units in their formative years, by
granting favorable tax treatment to losses incurred by investors in the formation
of the small business units. At least during the period prior to the adoption of
regulations spelling out under the authorization in the statute to promulgate
such regulations, the details required of the plan, we think that fidelity to the
purpose of the statute calls for liberal application of its language. Here the very
formation of the corporation and issue of its stock was expressed to be in
conformity with and limited to the conditions required by section 1244, the
amount and period of time actually involved were within the statutory
limitations, and the contemplated loss occurred.
Subsequent to oral argument, the Commissioner has called our attention to the
case of Spiegel v. Commissioner, 49 T.C. , filed February 23, 1968, denying
deduction for lack of a written plan. However, there were in that case no
corporate minutes referring to the adoption of a sec. 1244 plan, such as existed
here, and even then Judge Dawson recognized that the court was 'indeed faced
with a close question.'
8
The taxpayer complied with the terms and the spirit of the statute as it stood
when the stock was issued. There was no attempt to delay election of the form
the transaction should take, or create a hedge against the future. The purpose of
the plan requirement, to give unequivocal evidence of the taxpayer's
commitment to investment in the covered type of small business enterprise, is
met here. She is entitled to the benefit of the deduction under the statute.
The decision is reversed and remanded to the Tax Court for further proceedings
not inconsistent with this opinion.
**
Since the petitioner and her deceased husband filed joint returns, and acted
together on all the relevant transactions, we have treated all transactions as if
they were solely the petitioner's
(i) the aggregate amount which may be offered under the plan, plus
(ii) the aggregate amount of money and other property (taken into account in an
amount, as of the time received by the corporation, equal to the adjusted basis
to the corporation of such property for determining gain, reduced by any
liabilities to which the property was subject or which were assumed by the
corporation at such time) received by the corporation after June 30, 1958, for
stock, as a contribution to capital, and as paid-in surplus
does not exceed $500,000; and
(B) the sume of-(i) the aggregate amount which may be offered under the plan, plus
(ii) the equity capital of the corporation (determined on the date of the adoption
of the plan),
does not exceed $1,000,000.
For purposes of subparagraph (B), the equity capital of a corporation is the sum
of its money and other property (in an amount equal to the adjusted basis of
such property for determining gain), less the amount of its indebtedness (other
than indebtedness to shareholders).
(d) Special Rules.-(1) Limitations on amount of ordinary loss.-(A) Contributions of property having basis in excess of value.-- If-(i) section 1244 stock was issued in exchange for property,
(i2) the basis of such stock in the hands of the taxpayer is determined by
reference to the basis in his hands of such property, and
(iii) the adjusted basis (for determining loss) of such property immediately
before the exchange exceeded its fair market value at such time, then in
computing the amount of the loss on such stock for purposes of this section the
basis of such stock shall be reduced by an amount equal to the excess described
in clause (iii).
(B) Increases in basis.-- In computing the amount of the loss on stock for
purposes of this section, any increase in the basis of such stock (through
contributions to the capital of the corporation, or otherwise) shall be treated as